Nov. 2 (Bloomberg) -- When Smithfield Foods Inc. was trying
to fend off a union organizing drive at its largest meat-processing plant, it hired public relations executive Rick
Berman. They discussed “preparing the nuclear strike,”
according to e-mail records.

Soon after, a non-profit called the Center for Union Facts
began running television ads slamming the “union bosses” who
were trying to organize Smithfield’s plant in Tar Heel, North
Carolina. That was no coincidence: Berman also runs the center.

Berman operates five such non-profit groups from the
offices of his for-profit Washington public relations firm.
Those five organizations paid his firm $15 million from 2008 to
2010 for its work, tax records show.

Tax lawyers say this arrangement may violate Internal
Revenue Service rules that prohibit executives from profiting
off the tax-exempt entities they run. IRS rules also require
charities to have a public purpose.

Berman’s “web of organizations clearly, in my view, is
operating for his private benefit and for the private benefit of
his clients,” Marcus Owens, a former director of the exempt
organizations department at the IRS, said in an interview.
That’s “a clear violation of the requirements for tax-exempt
status.”

The IRS is being urged to revoke the groups’ exempt status
and impose penalties. The Humane Society of the United States
filed a complaint with the IRS in June, saying the non-profits
allow companies to fund anonymous corporate campaigns under a
charitable cover, and for Berman to unjustly profit.

‘Phony Non-Profit’

“Berman’s developed a cottage industry of setting up phony
non-profit organizations to take in money from corporations that
have a public relations problem,” Wayne Pacelle, the president
of the Humane Society, which has been the target of Berman-led
campaigns, said in an interview. “When you look at it in its
full composition, it’s a very disturbing picture.”

Anthony Burke, a spokesman for the IRS, said the agency is
prohibited by law from discussing any investigation, or even
confirming if an inquiry is underway. Such complaints can be
filed by anyone and the IRS doesn’t have to pursue them,
according to IRS rules. Past complaints against Berman’s
organization haven’t resulted in adverse judgments.

IRS Compliance

Sarah Longwell, a vice president of communications at
Richard Berman and Company Inc., declined by e-mail to comment.
She provided a Web link to a fact sheet that says the groups
Berman manages adhere to IRS standards. The IRS examined their
structures in the past, and hasn’t sanctioned or altered their
tax status, it said.

Bloomberg obtained the IRS complaint from the Humane
Society and independently reviewed tax documents, legal filings
and other public information about Berman’s groups. Five
independent outside experts contacted by Bloomberg said the
allegations warrant an IRS review.

“This is the kind of thing the IRS will not ignore,” said
Owens, a lawyer at Caplin & Drysdale in Washington who is not
involved in the dispute. The IRS could revoke the groups’ tax-exempt status and also launch a criminal probe, he said. While a
similar complaint was filed against one of the groups in 2004
and never resulted in penalties, the Humane Society’s evidence
is the most comprehensive compiled about Berman’s groups, he
said.

PETA ‘Myths’

The fact sheet from Berman’s firm said the Humane Society,
People for the Ethical Treatment of Animals and labor
organizations have created “myths” about Berman because he has
questioned their actions. One of Berman’s groups runs a website
called HumaneWatch.org that criticizes the Humane Society for
not giving enough of its budget to local animal shelters, and
for being “obsessed with veganism and attacking meat.”

“Berman and Company clients have acted as watchdogs who
question the motivation, tactics, and fundraising efforts of
these powerful groups,” the fact sheet said. “When these
organizations feel threatened they often respond by throwing mud
-- instead of debating the issues.”

Berman, 69, is a former labor lawyer for Bethlehem Steel
Corp., auto-parts maker Dana Corp. and the U.S. Chamber of
Commerce. In the mid-1980s, he formed Berman and Company with his
wife, Dixie, and set up shop in Washington. He began taking
on some of the most esteemed health and public-interest groups,
including Mothers Against Drunk Driving.

‘Dr. Evil’

Taking on unpopular causes -- such as objecting to new
restrictions on drinking or food portions -- earned him the
moniker “Dr. Evil” from the CBS News broadcast “60 Minutes”
in 2007.

In the 1990s, cigarette-maker Philip Morris USA, now part
of Altria Group Inc., poured hundreds of thousands of dollars
into a trade group Berman ran, which aimed to block smoking
sections in restaurants, according to internal documents Philip
Morris published as part of a settlement between the tobacco
industry and 46 states. Berman hasn’t worked with tobacco
companies for almost 15 years, his company’s fact sheet said.

From a suite of offices just a few blocks from the White
House, Berman runs his public relations firm. Also based in that
office are the four tax-exempt organizations for which IRS tax
forms show he is executive director: the Center for Consumer
Freedom, the Employment Policies Institute Foundation, the
Center for Union Facts and the Enterprise Freedom Action
Committee. A trade group for restaurants, the American Beverage
Institute, is also based there, and Berman is its president.

Targets Bloomberg

The groups advocate against measures to make it easier to
form a union, or limit what food or drink restaurants can sell.
They also keep tabs on health and animal rights’ activists,
running websites including ActivistCash.com, which tracks who
funds those groups; and PetaKillsAnimals.com, which criticizes
PETA for euthanizing adoptable pets.

The Center for Consumer Freedom has an advertising campaign
that opposes New York Mayor Michael Bloomberg’s ban on the sale
of soft drinks larger than 16 ounces. The mayor is the founder
and majority owner of Bloomberg LP, the parent of Bloomberg
News.

IRS rules say that charities may keep secret the donors to
their cause, and so, while evidence from court filings and the
tobacco documents link companies such as Smithfield, Bloomin’
Brands Inc. and Wal-Mart Stores Inc. to Berman’s groups, the
full scope of the companies or individuals funding these groups
is not available.

Secret Donors

“Private organizations have a constitutionally protected
right to keep their memberships confidential if there is good
reason to ensure anonymity,” the Berman fact sheet said.
“Considering the history of threats made by animal rights
organizations, environmental extremists, and labor unions
against opponents, it is an important right worth upholding.”

Pacelle said “one can only surmise” that companies fund
Berman’s non-profits, and then those innocuous-sounding groups
wage public campaigns on behalf of the corporation’s interests.

In a 2007 court deposition, Berman said of the tax-exempt
organizations: “I did set up most of them at the request of
clients.”

IRS regulations place restrictions on charities known as
501(c)(3) organizations, named after a section of the tax code.
IRS rules state that the groups must be set up for “exempt
purposes,” can’t provide excessive benefits to a private
shareholder or individual. They may not “attempt to influence
legislation as a substantial part of its activities.” To be a
public charity, the group must have a “broad base of support.”

Tax Rules

Three of Berman’s charitable groups are such 501(c)3s and
each violates most of those rules, the Humane Society said in
its complaint. The two other tax-exempt groups, classified under
related sections of the IRS code, have similar violations, it
said.

Many companies have used trade associations or business
groups such as the U.S. Chamber of Commerce to make
controversial lobbying or public relations pitches for them.
Others just hire a lobbyist or public relations’ firm
themselves, and don’t try to hide their identity.

“I don’t think it’s unusual, but nobody does it like
Berman does,” Melanie Sloan, executive director of Citizens for
Responsibility and Ethics in Washington, said in an interview.
Sloan’s group filed the IRS complaint against one of Berman’s
groups in 2004. There is no indication that the IRS took action
on it, she said.

Services Agreement

Berman’s relationship with the Center for Consumer Freedom
illustrates how the tax-exempt groups work with his public
relations firm. In 2002 Berman created an “Administrative and
Technical Services Agreement,” which established that the
Center for Consumer Freedom would pay Berman and Co. a monthly
fee for its work.

Individual Berman and Co. employees were to be paid their
hourly rate, which is “multiplied by a factor of three” to
cover overhead costs, taxes, salaries and profits, according to
the agreement that was included in the Humane Society complaint.
Berman signed the agreement both on behalf of his firm and the
Center for Consumer Freedom, or CCF.

“Who on the side of CCF determines whether to pay a bill
or not pay one?” Berman was asked by lawyer Steve Heikens in a
July 2007 court deposition.

Billable Hours

“I look at the hours billed to see if they’re
reasonable,” Berman explained.

“If you consider them reasonable, you have CCF pay Berman
and Company?”

“Correct,” Berman said.

The fees paid to Berman’s firm are similar to those for
advertising or law firms, and cover the cost for advertising
campaigns or to “keep the office lights on” and pay for the
firm to employ 30 people, the Berman fact sheet said.

CCF had about $2.2 million in revenue in 2010, the most
recent year for which tax returns are available, tax records
filed with the IRS show. CCF paid Berman and Co. $1.7 million in
compensation for management services, or about two-thirds of its
total spending for the year. The group gave out $1,700 in
grants.

Berman’s position as director of the tax-exempt
organizations that then hire his firm does raise “red flags,”
Miriam Galston, a professor of law at George Washington
University in Washington, said in an interview.

Greater Leeway

The complaint’s allegations against Berman’s American
Beverage Institute may go too far because its status as a trade
group gives it greater leeway under tax rules, she said.
Overall, the complaint does make “a good case that the IRS
needs to investigate” the charitable groups, said Galston, who
is not involved in the complaint.

Berman’s dual role is “not on its face a no-no, but it
raises questions,” Roger Colinvaux, an associate professor at
the Columbus School of Law at Catholic University who is not
involved in the complaint, said in an interview. “If I was at
the IRS, I would want to investigate.”

A separate lawsuit provides a few clues at how Smithfield,
the world’s largest pork producer, used Berman to fend off a
union organizing effort in 2007 at the Tar Heel plant, which is
the world’s largest pork-processing plant.

As the union drive accelerated, Berman, identified as a
Smithfield PR consultant, fired off a series of e-mails to
company executives, according to court records in a case that
was filed in federal court in Richmond, Virginia, by Smithfield
against the United Food and Commercial Workers union.

Sealed Records

While the e-mails themselves were subsequently sealed in
the court records, the subject lines are not: “offense game
plan,” said a message between Berman and Smithfield Executive
Vice President Richard Poulson. A similar e-mail string between
the two men on July 7 was titled: “have to orchestrate this and
have a script.” A third, undated e-mail added: “I am preparing
the nuclear strike.”

In mid-July, the Center for Union Facts had television
advertisements that ran and were posted online. A narrator
asked: “What do you love about the UFCW?” and then had workers
offering a few retorts.

“You know what I love? Paying union dues just so I can
keep my job,” said one cashier in the ad. And the ads showed a
website to visit: UFCWExposed.com. The site is no longer active.

Smithfield isn’t working with any of Berman’s groups now,
company spokeswoman Keira Lombardo said in an e-mail. She
declined further comment. Smithfield settled the lawsuit with
the UFCW and the workers at the Tar Heel facility have voted to
form a union.

PETA Documentary

In 2005, filmmakers Maura Flynn and Curt Johnson approached
Berman to do a documentary movie about animal-rights activists,
including PETA. Berman agreed to underwrite a film “exposing
the excesses” of PETA, and to provide $300,000, he testified in
a 2007 case he filed against Johnson. The case in federal court
in Alexandria, Virginia, alleged breach of contract and fraud.

Berman got Hormel Foods Corp. to chip in $50,000 to the
filmmakers, according to a copy of a canceled check included in
the court documents. He pitched the film to executives from
Tyson Foods Inc. and Bloomin’ Brands’ Outback Steakhouse for
their support as well, he testified.

‘Mommy Kills’

That arrangement went awry when an edit of the film, “Your
Mommy Kills Animals,” was shown to Berman. Berman testified in
his deposition that the film gave animal rights’ activists “a
sympathetic portrayal that I didn’t think was justified.” He
said that portrayal caused damage to his reputation among the
corporate executives he worked with.

The film was completed, but not widely distributed. Berman
was awarded $370,000.

“Berman thought he was going to get a hit piece on PETA,”
Heikens, who was Johnson’s lawyer in the case, said in an
interview. “Curt was making a neutral film instead.”

Johnson couldn’t be reached for comment. Rick Williamson, a
spokesman for Hormel, didn’t return three telephone and three e-mail messages. Gary Mickelson, a spokesman for Tyson, declined
to comment.

The Humane Society also alleges that financial transfers
between organizations established by Berman let the groups
“create the illusion of public support” required for non-profit status.

Health Care

The Center for Consumer Freedom in 2009 received $8 million
in income and provided a grant of $6.9 million to another
organization run by Berman and Co., the Employment Policies
Institute Foundation, according to tax records filed with the
IRS. That same year, the Foundation spent $7 million -- about 64
percent of its $10.9 million in total revenue -- on a publicity
campaign asserting that health-care reform would raise costs for
consumers.

As a result, each of the groups can falsely appear to
legitimately qualify for tax-exempt status, the Humane Society
complaint said.

“This mess of Berman and his empire of non-profits has
gone on for too long,” Francis Hill, a professor of law at the
University of Miami law school and author of the treatise,
Taxation of Exempt Entities, said in an interview. It “seems
like an appalling abuse of tax-exempt status.”